Stock Options: When it comes to trading options vs stocks one isn’t necessarily better than the other and they are not mutually exclusive. If you’re a stock trader or a wannabe stock trader there probably isn’t any reason for you to trade stocks versus the options on the stocks other than fear, lack of knowledge or possibly the belief that trading options is inherently complicated and very risky. While all of the above listed reasons are good reasons for not trading a given security they probably apply to trading options a lot less than most people believe. Trading any type of security is risky and a good way to partially deal with the risk is through education. The more you understand a given type of security the less daunting and scary it will become and the better equipped you will be to protect yourself when trading it.
A simple and basic stock trade can be very scary for people that do not normally trade stocks but after you trade for a time and get accustomed to how trading works it is much less scary. Trading in the Forex market has this effect on people because it is the biggest, fastest and some may say the most ridiculous market we have created but I love it, I’m a very active Forex trader. I understand the Forex market so it’s not scary to me at all. The more you know about something the more normal it seems, trading options is no different.
If you start to think about trading options from a business standpoint and even from a common sense standpoint you will likely see that there are tremendous advantages around trading stock options versus trading the actual shares of stock. One objection that I have heard around trading stock options is that you do not own the actual shares of stock when you trade the options but a basic business reality is that who owns something is often times far less important than who controls it so having control without ownership can be very advantageous.
The business part and maybe the common sense part of trading options comes in when you look at how much it costs to purchase 100 shares of a given stock versus purchasing an option to control 100 shares of the same stock. It will typically take a fraction of the money to buy an option than it will take to buy the actual shares leaving you with more capital to make work for you elsewhere. It can also be an advantage for people with smaller accounts that may not be able to afford to purchase 100 shares of stock, buying an option is typically much more affordable. Purchasing 100 shares of a $150.00 per share stock would cost $15,000.00 plus transaction fees but buying an option on that same stock would likely cost about $1,000.00 and maybe less. When you buy a stock the entire amount of your purchase is at risk and when you buy an option the entire amount is also at risk, the obvious difference is the smaller amount of cash that is used and at risk for the option purchase.
If you are not currently trading options and you have a good method for picking which stocks to trade I believe that it may be a very good idea to continue doing exactly what you are doing but when you make a stock purchase look at the available options. Look at the price of one of them that is a few strikes in the money and that has a few months until it expires. Follow the price movement of the stock and the option and when your stock trade ends compare the results to an options trade over that same period of time to see which one provides a better return. If it is a winning trade the options trade would almost always provide a far superior return with less risk. If you are successfully trading stocks there is no reason to change anything but it may be a good idea to look at the advantages of options trading possibly including it with what you are already doing. Having a few small options positions in conjunction with your typical stock positions may be a very good way for you to participate in more trades while enhancing your total return.